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To buy or not to buy, that is the 21st century question

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Buying a house is probably one of the biggest financial decisions we may ever make in our lives, and such decisions can be daunting and risky. To help us make wiser choices, REIWA and Curtin University have released a Buy-Rent Index tool that can help us figure out the best time to buy or rent in the Perth metro area.

Suburban Australian homes.
Is owning a home still an achievable dream for Australians?

“We are trying to create an awareness and understanding of the housing ownership decision,” says J-Han Ho, creator of the Index and senior lecturer in Curtin’s School of Economics and Finance.

“We understand the complexities and challenges of housing affordability and how it translates to household wellbeing. Therefore, we hope the Buy-Rent Index will make it a little easier for households to make an informed decision.”

The Index will be released on a quarterly basis and is aimed at people who are considering the buy or rent dilemma. It is based on formulated assumptions, including past and predicted trends in the economic climate, to help identify the annual house price growth rate required for home ownership to be financially advantageous over renting.

“The primary objective was to rationalise the financial cost benefit analysis of buying versus renting,” Ho says.

“The most cost-effective way is just to live at home with your mum and dad forever, but if you want to go out there and be independent, which most Aussies do, is homeownership better than renting?”

According to the Index’s latest figures, the median house price in Perth ($508,000) would need to appreciate by more than 4.3 per cent annually over the next 10 years for the purchase of a house to be considered financially viable over renting at the median rental price ($360 per week). Ho explains that 4.3 per cent is the breakeven point between buying versus renting over a ten-year period based on simulations on aggregated and estimated data.

“Many households only focus on the location and price of the property when looking to buy, but this shows there are many other factors that need to be considered including interest rates, opportunity cost of capital and the property being a long-term investment,” Ho says.

“Buying at the right time could achieve a superior outcome to buying in the right location.”

Ho stresses it is essential for individuals or households to thoroughly assess their financial situation, mobility and income stability prior to making homeownership decisions.

“Seek professional financial advice and account for contingencies,” he adds.

According to the 2016 ASX Long-term Investing Report, residential investment properties have outperformed all major asset classes over the last 10 years with an annual gross return of 8.0 per cent per annum, and 20 years with 10.5 per cent per annum. However, the report warns there are signs the property dream run is ending, and a slowdown is forecast.

So, is it better to rent or buy? Ho says the Index is not a “crystal ball” and is cautious to ensure he is not giving financial advice. However, he can advise that people use resources like the Index to learn as much as they can to make better informed decisions about their financial wellbeing and homeownership.

“I think it is much more responsible for me to raise the question to you and get you curious to find out more about what’s in this document,” Ho says. “I want people to be educated about all the issues they need to consider when it comes to making a decision about buying a house.”

REIWA also releases an accessible quarterly publication which highlights real estate activity across Western Australia.

About J-Han Ho

J-Han Ho was the Group Chief Investment Officer of an ASX listed company that operated internationally. He has extensive experience in the real estate industry and is currently undertaking a PhD thesis that focuses on housing purchase decisions based on financial methodologies, econometric analysis and forecasting methods. He aims to use the findings from his PhD to provide housing policy recommendations to government, investment modelling for large-scale developments and decision-making models for Australian housing markets.

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