No property bubble, but RBA pinpoints the possible future wisdom in renting

No property bubble, but RBA pinpoints the possible future wisdom in renting

Reserve Bank of Australia research has suggested that house prices would have to continue to rise at the same rate as over the last six decades for property owners to be as well off financially as renters.

Home ownership is more attractive the longer a house is owned, because transactions costs are amortised over a longer period, it concluded.

Assuming real house prices increased at the historical 2.4%, buying beats renting when the owner held for more than eight years.

But with the 1.7% rate experienced over just the past 10 years, owning only beat renting over an ownership period longer than 30 years.

“Consistent with conventional wisdom, households expecting to move again in a few years’ time are better off renting, unless they believe they can sell the property for an unusually large capital gain,” the 45 page research paper said.

“We find that if real house prices grow at their historical average pace, then owning a home is about as expensive as renting.

“If prices grow more slowly, as some forecasters predict, the framework used in this paper suggests that the average home buyer would be financially better off renting.

“We decompose house prices into contributions from rents, interest rates and expected capital gains, which may help policy makers in the detection of housing bubbles.

“Recent data do not show signs of a bubble,” the RBA researchers Ryan Fox and Peter Tulip suggested.

Given that individual circumstances vary, the paper noted that no-one should base personal investment decisions solely on the estimates. 

The key limitation within the paper, the RBA noted was that it focused on owner-occupied purchases, as investors in housing may be better off because of tax reasons.

The RBA also noted non-financial benefits such as security of tenure, pride of ownership and freedom to renovate.

Real house prices have increased at an average annual rate of slightly less than 2.5% since 1955.

“If this rate of appreciation is expected to continue then our estimates suggest that houses are fairly valued.

“Forecasting house price growth is subject to considerable uncertainty.

“That said, many observers have suggested that future house price growth is likely to be somewhat less than this historic average.

“In that case, at current prices, rents, interest rates and so on, the average household is probably financially better off renting than buying.”

It noted overfall prices were overvalued in the early 2000s, becoming undervalued in the second half of the decade, then switching back to overvalued following the global financial crisis. 

The discussion paper series is intended to make the results of the current economic research within the Reserve Bank available to other economists. Its aim is to present preliminary results of research so as to encourage discussion and comment.

The views expressed are those of the authors and not necessarily those of the Reserve Bank. 

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