Prospective homebuyers have had a lot to contend with over the last year. Rising property prices, diminishing borrowing power and ballooning deposit requirements are making home ownership seem like a distant goal for some. And we’re not seeing many signs that those affordability challenges are abating going into 2024.

But things have been tough for renters too, with the average weekly rent in Australia rising 8.3% last year. While this is lower than the increases recorded in 2021 and 2022, it’s still more than four times higher than the pre-COVID decade average of 2.0% per annum.¹

According to ANZ and CoreLogic’s latest Housing Affordability Report, the current rental crunch has renters spending around 31% of their income on accommodation. Meanwhile, the portion of household income required to service a new mortgage sits at around 46.2%.²

The outlook for both cohorts in 2024 will undoubtedly be influenced by where interest rates are heading. With the fall in inflation figures, financial markets appear to be pricing in a 25 basis point rate cut by June this year. Whether this prediction eventuates or not remains to be seen.

But even with rate cuts potentially on the horizon, the outlook for property prices isn’t so clear. Cheaper borrowing rates usually mean more people flocking to buy property, but some analysts say the same factors which tempered demand in the second half of last year — cost of living pressures, worsening affordability, and poor consumer sentiment — could continue to weigh on the market in 2024.³

Credit availability is also likely to remain tight, with APRA announcing in December it will be maintaining the 3% serviceability buffer lenders have to adhere to (with some exemptions in certain circumstances).⁴ This aims to curb risky lending by ensuring home loan applicants can withstand a substantial increase in rates.

As for rents, most markets are showing signs of easing, and the projected slowdown in net overseas migration could spell good news for struggling renters in the coming years. But according to some analysts, growth in rents is still expected to remain above average thanks to the imbalance in supply and demand.⁵

Renting or buying: Is one better?

While renters face their fair share of challenges, the barriers to entry are arguably much higher for homebuyers. Not only do they usually need 20% of a property’s value saved up (along with the money to cover stamp duty and other transaction costs), their finances tend to be subjected to much more scrutiny.

Lenders will examine applicants’ saving and spending habits for signs that they can manage their money responsibly. They will also pull up credit histories, ask for lists of assets and liabilities, and potentially contact employers to verify the income and employment details they’ve been provided.

Even once those hurdles have been cleared and a contract has been signed, the challenges for buyers don’t stop. Monthly mortgage repayments can be high (especially considering the current interest rate environment), and homeowners will also have to budget for things like council rates, strata fees, water bills, and home insurance (not to mention general upkeep).

Of course, there are two big advantages that buying has over renting. The first is that your monthly repayments will help build up equity in your home, and once your loan is paid off you’ll have a property to call your own. The second is that your home has the potential to appreciate in value over time.

So while the upfront and ongoing costs are high, there might be significant payoffs in the form of wealth and security down the track.

But is this achievable only by purchasing a home? Behavioural economist Simon Russell reminds us that there’s more than one way to build long-term wealth, and in fact renters might be able to accumulate a sizable investment portfolio so long as they’re disciplined enough to save.

For example, they could potentially do this by regularly investing the difference between what they’d be required to pay as a property owner and what they’re actually paying as a renter. The idea here is to have your investment portfolio serve as an enforced saving and wealth accumulation device, much like many property owners treat their mortgage and other overhead costs.

Renting might also appeal more than buying if not being tied to a single home or area is a priority. And unlike homebuyers, renters typically don’t have to worry about maintenance costs and paying property taxes.

Eventual home ownership may be a major motivator for many Australians, but there are many reasons why someone might choose renting over buying or vice versa. At the end of the day, your lifestyle, preferences and financial situation will determine which one is right for you.

Sources

1 CoreLogic
2 CoreLogic
3 The Guardian
4 APRA
5 CoreLogic