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Why renting rocks ... and will continue to
Monday, May 18, 2009
Am I right in thinking there is a whiff of renter disdain surrounding this blog?
As a former home owner that has been financially ravaged by divorce, I rent while I decide whether and what to buy again.
For me, there is much to be gained from the freedom, flexibility and tax-deductibility of renting ( I work from a home office, so a portion of my rent is an expense to my business). I rent a house which the owner paid $925,000 for in January this year and pay $560 a week rent.
I suspect too many people get carried away believing that buying property means you will "never lose" when in fact plenty of people can and do lose thousands buying their own home. Myself included.
Take some friends of mine, a highly indebted couple who both earn good salaries but spend more than $5000 a month in mortgage payments. These home owners are paying $30,000 a year in "dead money" because they could rent a similar house nearby for $2500 a month.
There is another friend of mine, who has been renting for years, and has managed to accumulate way more "equity" by being free from hefty mortgage payments. She has considerable savings, even after being ravaged by the stock market, and is now in a position to buy with an extremely low mortgage.
Who is better off? The renter or the home owner?
Real estate advocate Neil Jenman says negative gearing - where investors speculate on residential property by claiming losses as a tax deduction - encouraged a flood of mums and dads to invest in residential property.
Plenty of those property investors - particularly those who bought before 2003 - have made fantastic capital gains, especially if they were smart enough to sell and take the gains rather than use the money to fuel further debt for property speculation.
Jenman argues this over-investment in residential property forced up capital prices to the point where people who effectively run our communities -- the nurses, police, fire brigade and cleaners -- can not afford to buy a home near where they work.
The flip side benefit of this rush to negative gearing is rents remain much "cheaper" than owning. Which is the whole reason the Australian government allows negative gearing in the first place -- it encourages an affordable rental market.
2005-2006 Australian Tax Office statistics revealed that negative gearing created an average annual loss for each investor of 27.5 per cent.
The capital cost of owning a rental property is much higher than rental income -- or personal income -- should dictate. In other words, the fundamentals are out of whack when people buy something knowing they will lose nearly one-third of their money on it.
Dr Joe Flood says "Australian landlords are hurting – although the government has been absorbing a significant proportion of their loss and risk through the tax system."
Raine & Horne CEO Angus Raine says many landlords are trying to sell their properties, which first home buyers are snapping up in a frenzy.
"Something like 70 per cent of landlords rely on only one rental property and absolutely rely on that rental income to pay their mortgage," he says.
Surely this means that the great property boom of the last five years -- in which most Australian house prices have nominally doubled -- has also benefited renters?
Rents -- while still rising in areas of high demand -- have effectively remained cheaper than they might have done had house prices not skyrocketed.
(By the way, SQM Research offer a great tool where you can check the vacancy rates of certain areas to see whether rents are likely to rise or fall -- click here, agree to terms and conditions and enter the region or postcode.)
Other benefits of renting include:
- easy access to move and relocate to take advantage of job opportunities or a need for a bigger or better home, especially as home owners need to pay stamp duty (which is at least $10,000) plus selling fees of around 2 per cent.
- monthly payments are fixed during a lease period and should legally include basic property maintenance, freeing the renter from fixed expenses like council rates and costly property repairs.
Believe me, I realise that owning a home has plenty of benefits too. As does investing in property. But sometimes I think we need reminding that renting is not a bad form of tenure ... and can also be one of the smartest choices in today's uncertain property climate.
If the capital value of residential property fails to rise dramatically in the next five years, the renter who saves a good deposit and buys in five years time might just be the winner over the first home buyer or investor who rushes in today ... don't you think?
- Posted by Alex Brooks - Domain.com.au
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