Unless you’ve been living under a rock in recent years, you’ve probably seen at least one article on Australian millennials and the insane house prices locking us out of buying.
'Cubby house' syndrome intensifying among millennials was a beauty of a headline.
I am also partial to this gem: Enough about avo on toast: We spoke to the experts to find the real reasons why housing is so expensive for young Australians.
The regularity with which these articles pop up can be enough to drive you crazy, if not stir some emotional and financial panic that you’ll forever be beholden to a landlord.
That’s not surprising, given a survey has found 94 per cent of Australian millennials rate home ownership as important but 58 per cent are unable to afford the deposit right away.
Recently, though, a new way of thinking has started to creep into the headlines.
What if we decided to remain a generation of renters and try our luck investing elsewhere?
Research conducted by EY Sweeney has found that two out of three Sydney residents think renting is a waste of money. But the average house in Sydney costs 10.9 times the average NSW income. Worse, the buyer of an average Sydney home needs to save for more than seven years to reach the 20 per cent deposit required for an apartment.
So, EY Sweeney did some economic modelling.
Two home seekers, with the same starting capital, made different choices.
One put 20 per cent down on a unit (purchased with a mortgage at 80% loan-to-value-ratio).
The other rented a similar dwelling in the same location and purchased an ASX200 index fund (purchased with a margin loan at 50% loan-to-value ratio). The renter continued to place the ongoing savings in housing costs — i.e. the difference between their rent and the costs the buyer faced — into the index fund, while also reinvesting any dividends from the index fund.
After running this model on 43 areas in Sydney between 1994 and 2017, the research found that 62 per cent of the time, the renter was better off. (Also noteworthy: in this model, the renter takes on a higher risk profile than most might, and as such, if the market dropped significantly, they could receive a margin call.)
It makes for an interesting argument — especially if, you know, you’re hunting for some polite dinner conversation topics. But as we all know, nothing to do with money is ever simple.
With buying, you eliminate a lot of your housing expenses once your mortgage is paid off!
But with renting, you don't have to pay for repairs or maintenance!
But with buying, there can be tax credits!
And with renting, you can get returns in the long-term, say, by investing in the stock market!
(I could go all day.)
The bottom line is that this new way of thinking is worth exploring. The right decision will look different for all of you, but that doesn’t mean it’s the wrong decision.