Buying a home versus renting

RECENTLY property analysts RP Data listed country towns and suburbs where it is cheaper to buy a home than rent one. 

Towns on the list include Cowra, Wellington, Dubbo, Cobar, Cootamundra, Deniliquin and Broken Hill. 

This implies that people living in these places should buy rather than rent a home and others with good employability should consider moving to these places to live. 

There are many factors to consider in such a proposition. 

RP Data compared the average rent advertised in each town with the payments required on a home loan of 90 per cent of the average property value there, assuming a 10 per cent deposit is paid. The loan interest rate used is that for current basic home loans, 5.9 per cent per annum average.  

While mortgage payments may be less than rents in these towns, owning a property requires other substantial ongoing costs as well. These include council and water rates, strata levies, and repairs and maintenance. 

However buying our own home gives us more security and is a key to building wealth. It should be the preferred strategy unless there are circumstances that make it impractical, which there sometimes are. 

As an owner we cannot be asked to vacate by a landlord. We can make alterations to the home or redecorate it to suit our needs. We can plant and develop a garden of our own. Tenants cannot do these things.  

Owning our home can help build wealth in several ways. Over time the value of the property should grow. The mortgage will also reduce, unless it is an interest-only loan, and the essential loan payments will be a forced saving scheme for us. 

We can increase the property’s value by renovating or extending it. Improvements can be done in stages to suit us, as we can afford them. These factors will increase our equity in the property, the proportion that is ours, the difference between its value and the debt owing. 

Some circumstances make it unwise to buy a home, regardless of how cheap it may be. If we are only likely to be in a town for a short period, such as a short employment contract, it would be unwise to buy.

This is risky because of the costs to buy and sell. There is a large government stamp duty cost, except for first home buyers. There are also legal and other costs to buy. When we sell to move on there are more costs, including the agent's selling fee and further legal costs.

If buying is unsuitable it is no shame to rent. We must all pay to have a roof over our head. Even if we own the property we live in we miss out on the rent we would have received from a tenant had we not chosen to live there. 

As we are hoping for at least some capital gain it is also important to consider the growth potential of a property. Is there likely to be growth in this location? 

It may be unwise to buy in a mining town where the mine has a limited life until the ore runs out. There is a widely held perception that city and coastal properties will provide better growth. However most coastal properties have performed poorly over recent years.  

Meanwhile many inland towns have provided sound growth. Remote locations often have a serious shortage of rental properties so rent returns for investors are very high. This has helped ensure capital gains just where investors least expected it. 

First home buyers who buy a new home are now eligible for a $15,000 grant, making a purchase very enticing. There is no longer any grant for first home buyers buying existing homes, though stamp duty concessions for all first home buyers still apply. 

There is a also a $7000 relocation grant available to people who sell their city home and buy one in a country town. Let's hope the publication of the “cheaper-to-buy” list creates a big surge in demand for this grant. 

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