Rent or buy? The tough choice for young Aussies

With historically high home prices and recent interest rises, there has been some discussion in the media about young Australians giving up on the prospect of owning a home. Some reports suggest that Gen Z Australians have started spending their home deposits on travelling, believing they will have to rent for the rest of their lives anyway. This raises the question of whether rising home prices still mean owning a home is cheaper in the long run, or whether it has made renting more cost effective?

Total housing costs: home loan vs renting

To figure out whether homeownership or renting is cheaper in the long run we need a model of total housing costs. This will be able to show how much a person will have to spend per week on housing as an expense if they choose to take on a home loan or rent. For simplicity, let us assume a 1% growth per year in property maintenance/strata, water bills, electricity bills, and council rates, an average 4% interest rate over 30 years, a 20% deposit, and $500 in extra monthly payments. For home prices the model uses a weighted average of median sales prices across suburbs in Australia. For home price growth the model assumes the 20 year CAGR. Both figures are from CoreLogic's property market data.

With those assumptions, the model shows that young Australians looking to buy the average house will have to own it for over 37 years to start coming off better in total housing costs compared to renting for the same number of years. Buying the average unit is not much better, with Aussies having to own it for over 32 years to come off better than life time-long renters. This means that if young Australians purchase a first home at the age of 30, they will be well into their late 60s before they start breaking even on total housing costs compared to life-long renters. In effect, young Australians face a 'mortgage hangover', having to own a home 11 years after paying off the mortgage to break even with renters.

After 37 years of owning a house, young Australians will have spent $1,599,732 on housing costs, which would be equivalent to $910 in rent per week. For the average unit, after 32 years, they will have spent $1,116,282 or the equivalent of $763 in rent.

The key take away from this is that, the model suggests that home ownership remains expensive for a number of years even after paying off the home loan. It shows that although owning a home does become cheaper than renting, it only becomes cheaper in retirement.

Mortgage hangover across the states

Homeownership in Victoria takes the longest to break even against renting. A young person will only start breaking even with renters after 44 years of owning a house, and 34 years of owning a unit. At that point they will have spent $1,775,986 on total housing costs if they bought a house, or $1,119,803 if they bought a unit. This is equivalent to having spent $847 per week in rent on a house or $697 on a unit for those years.

The main driver of this is that currently renting is 16% cheaper for houses and 13% cheaper for units compared to the national average. However, house prices are 7% more expensive and unit prices are only 1% cheaper. This means that buying a property is a worse deal over the long-term in Victoria compared to the rest of the country.

NSW comes in second with homeowners breaking even after 41 years of owning a house, and 33 years for a unit. The Northern Territory and Western Australia are the best places to buy property, with homeowners breaking even compared to renters in less than 30 years of homeownership which is the typical home loan term. In the NT young Australians who manage to buy a house will break even after 26 years, and 22 years after buying a unit. In WA, breaking even on a house purchase will take 29 years, and 23 years for a unit.

One of the easiest ways homeowners can break even compared to renting faster is by making extra payments. RBA data shows excess payments on home loans have fallen to $3.441 billion per quarter, which is the lowest since September 2019.

On average, increasing the extra payments from $500 to $2000 per month will save homeowners 9 years on home loan for a house, and 8 years on a unit. This translates to breaking even 4 years faster on a house, and 3 years faster with a unit.

Housing as an asset

One advantage of buying a home is the equity built up over time. Although this doesn't discount the total money spent on housing costs, it provides an asset that can be used for other purposes.

Using the annual growth rate of home prices for the last 20 years, the average Aussie breaking even on house after 37 years will have an asset worth 475% more than what they paid for it over that period. On units they will have an asset worth 164% more.

Tasmania and Victoria come out best for homeowners on this measure. In Victoria breaking even after 44 years of owning a house, will leave the owner with an asset worth 932% more than what they spent on it over those years. In Tasmania that figure is 817%.

The worst state is the Northern Territory, where despite being a place where one can break even compared to renting the fastest, homeowners will be left with a house worth 143% more than what they spend on it, and a unit worth 39% more.

Homeownership although taking a significant amount of time across Australia leaves most Aussies with an asset worth significantly more than what they spent on it.

How financially better off a person is from owning a home compared to renting depends on what they use the equity built up in their home for. If a person simply buys a property and lives in it as an owner-occupier, the model shows that owning a property becomes cheaper only in retirement. But, if a person is able to use their home equity into making other investments they can grow their wealth further.