Renting vs Buying: beyond the obvious pro's and con's
Common debate has it that why rent a home if a monthly rental is equivalent to a monthly home loan repayment? What most should realise is that this is somewhat flawed thinking. While you might compare apples to apples on a pro's and con's basis, the ultimate decision is dependent on individual needs, objectives and your financial health, both today and in the future.
There are innumerable factors beyond an individual's control that may be influential. Circumstances can change in a minute, both from a personal and global perspective. A single event like Covid-19 and the war between Russia-Ukraine have dramatically affected economies and led to increases in consumer prices and currency value drops, and by default, the housing market. An unforeseen job loss, a debilitating long-term illness or death of a financially contributing family member can also shatter a well-planned dream or desire.
Protection from shocks is not guaranteed, no matter how much one hedges risk or insures against potential incidents. Markets change, and not just annually, but seasonally and regionally. This makes the choice between renting or purchasing a property a significant challenge. However, there are online tools - some of which are free - that can assist in facilitating a sound decision. There are also very credible and qualified analytics that are provided by industry professionals and economists, even property practitioners and agencies who have incorporated constant monitoring of the economy and property market in their daily tasks.
Some of the tools they use are
- Ooba
- A home loans specialist
- Your monthly rent payment
- Equity in a valuable asset
- Lightstone, that provides informative property reports.
However, when it comes to factoring in your personal finances, it is practical to take a deeper dive, which can be done in two ways:
Scenario forecasting
This strategic method creates scenarios based on assumed uncertainties that are plausible, and which includes visible and invisible risks. Essentially it means analysing multiple alternative scenarios that may occur in the future, and the extent to which these will evolve and/or interact. Using the 'what if' principle, you can establish what will happen to your budget if a certain event were to occur, eg. interest rate hikes, if your salary doesn't increase with inflation etc.
This is a somewhat difficult exercise that requires a constant readjustment of figures, changes in your budget, and monitoring of events that have a bearing on the economy, the property industry, and any significant changes in your personal life, such as a move to a new, more expensive region, and even family growth.
There are many online formula's, tools, and Apps that can assist. Key direction and guidance can be sourced from news headlines, economist predictions, property practitioners and agencies, and your own debt and budget analysis. Bear in mind too, that all home loan organisations like banks undertake analysis, which informs their policies and directives when granting a home loan. If you are aligned to their findings, you'll be able to prepare ahead and avoid rejection.
Simple analysis If scenario planning is too complicated, a far more simpler analysis can be put together using something like an Excel spreadsheet. Here you would have to at least include assumptions, such as the purchase price of a typical home you like, the deposit, interest rate (current or assumed), how long it will take to pay off the principal borrowed amount (amortisation), any property taxes like capital gains, monthly sectional title fees if applicable, assumed annual appreciation of the property, annual maintenance, builders insurance, monthly home loan payment, and how much interest you will be paying over the term of the mortgage.
This would e compared to the costs of renting a similar home, and what sort of return you can expect if you were to invest a saved deposit elsewhere. It would exclude maintenance, amortisation, taxes, insurance etc.
A blended approach
Bear in mind that both renting and purchasing a property has value, but both can work harmoniously. If the goal is to buy a house but you currently don't have the financial means to do that, a rent-to-buy option may be a consideration.
Regardless of statistics that may tell you 'now' is the time to buy, the emphasis must always be on YOUR affordability. Even when the market looks healthy, or you come across a property bargain, do the math before committing to a decision because the future will always be uncertain.
22 Feb 2024
Author Private Property