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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 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. His areas of interest are in investment and development feasibility, housing, economic analysis and general analysis of the property industry.


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This story has 4 comments

  1. Andras Szito says:

    I guess it is one of the fundamental mistake almost every author makes when dealing with the buying or renting issue purely from economic point of view. This approach considers the house only as investment and return completely neglecting the value in living in a home where you are safe and not depending on the landlord’s interest and where you are free to drive multiple nails in the wall without reprecussions or even keep a pet. Over the age of 50 is by far the most important consideration should be retireing with owning the house without mortgage!

  2. Paul Clune says:

    Melbourne & Sydney are where 45% of Australians live – like no other country! “Decentralize” is what should be planned and done. As to 33% of Australia (Yes Victoria is 3% !) and the reality that wars are fought over land ownership by tricking the world into believing it’s religion & Perth has 75% of West Australians living in less than 2% of W.A. – again I urge: “decentralize”! No, the majority of W.A.’s 1,000,000 square miles is not even close to being desert! Use Google earth to see it – please ! Merry Christmas. Rgds PPC

    • Blow me a Kiss says:

      Hi PPC Good comment. The people who live in the big cities are always told yes TOLD by the media that anything outside of their local suburb is remote and referred to as ‘THE BUSH’. The OUTBACK is some where out there but who cares. I think shifting the Federal Government from Canberra to the middle of Australia a good start. Yes I do mean Alice Springs.

  3. David says:

    I agree with Andras. You must own your own home upon retirement.
    Even with future generations having a full working life’s worth of Superannuation, renting is not a viable option, unless you are disciplined enough to add significantly to your Super throughout your working life to provide the additional income to pay rent.
    If you do buy a home, buy wisely and if possible, never move to “upgrade”, and pay it off as quickly as you can!
    Buy as close as possible to good public transport links!
    If you can pay off your house a decade before retirement, and your children have flown the nest, a whole new wonderful world will open up for you!
    They could be the best years of your life!

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