When you ask your friends and family for financial advice, you’ll probably find a few common themes in what they’re telling you. Things that everyone says, often preceded by “it all boils down to…”, “all you have to do is…”, or the new favourite, “kids these days need to remember…”. But what if those statements that we take as truisms aren’t actually true? Here are a few common myths that you might need to bust to get on a financial path that’s right for you.
“It’s always better to own a home than to rent.”
Home ownership is a personal decision. Whether or not it’s something you aim for will depend on your goals and circumstances. You may not wish to own a home if you’re planning to travel, work overseas, or take a career break. You may choose to delay owning a home if you can’t afford to buy within a fair distance of where you work. Or you might choose to keep renting if you have caring responsibilities and need to be close to an elderly relative. There are an endless number of reasons why renting might make more sense for you than trying to buy a home – at least for the time being.
Some of the common pros and cons are:
“Renting is cheaper than owning.”
Thanks to negative gearing and other tax arrangements, renting is often cheaper than buying a home. But there are lots of ‘what ifs’ to this statement. For the comparison to make sense, you have to be comparing two similar residences in similar areas. For example, renting a one bedroom apartment is logically going to cost a lot less than paying the mortgage on a three bedroom house.
You’ve also got to be comparing similar areas. It may actually be much cheaper to buy a house in a suburb at the end of the train line, rather than rent a unit or apartment in the city – even when you factor in buying costs. For example, a quick search three bedroom properties[i] reveals that the mortgage payments[ii] on a modest house in an outer suburb are well under half the monthly rent for a house in an inner city location.
“House prices always go up.”
A lot of people buy property because they’re confident that the price will go up and they’ll make a profit (or at least break even, after transaction costs). Prices do generally go up in the long term. But whether or not you end up ahead will depend on exactly where and when you buy, and when you sell.
In some places, prices go down and stay down because the factors keeping prices up no longer exist. For example, a local factory or industry might go bust, or a major transport route might get re-routed. Think about mining towns in Western Australia and Queensland.
When you’re looking at a suburb close to a capital city, house prices can go down for a number of different reasons. For example, a school might be closed or re-zoned. New and better services might make an otherwise comparable neighbouring suburb more attractive. Lots of new developments might come on the market, giving buyers lots of options.
If you want to get a better idea of where prices in one suburb are headed, it could be a good idea to look at the long term trend. You can find some of this information on the website of the Valuer General for your state. Look at the average price growth over at least ten years. For example, a look at the data for Victoria shows that house prices in Ashwood went up nearly 30% in 2014-15, but just over 11% a year in 2005-2015[iii].
There are other sets of data you can look at to see where property prices in general are going. The point is that it pays to do your research first. And as always, if in doubt, talk to a professional.
PS: If you haven’t already, make sure you check out the Money101 units on buying property and investing. They’ll give you a lot of the background knowledge you need to make smart decisions with confidence.