Avoiding the rental trap

With property prices across Australia consistently rising rather than falling, buying your first home may seem discouragingly out of reach. However, a new discussion paper from the Housing Industry Association (HIA) showing that rents are creeping up at a faster-than-usual rate may prompt some tenants to swap renting for home ownership.

Vacancy rates across Australia have remained “historically tight”, according to the HIA’s Observations of Australia’s Rental Market discussion paper released this month, which drives up rental prices. The HIA further reported that the rate of rental inflation surged in the early stages of the global financial crisis and has remained above its two-decade average since then.

“It is likely that rental price inflation will remain relatively brisk for the foreseeable future,” the discussion paper stated.

Making the issue worse is that rising rents are now affecting a higher proportion of the population. According to Swinburne University’s Australian Housing and Research Institute, 4.5 million Australians are currently renting – or twice as many as in 1981.

Financial security

“Ultimately, from a financial planning perspective, it makes good financial sense to own your own home,” said Deborah Kent, owner of Integra Financial Services and NSW State Director of the Association of Financial Advisers.

“While you may be young now and not worried about it, you don’t want to be in the precarious situation of not owning your own home in retirement – it adds an extra layer of financial stress. Rents are high if you don’t have enough to retire on.”

The traditional notion that renting is dead money isn’t necessarily accurate, Kent added – provided you exercise some financial control. “Rent isn’t necessarily lost money if you put some discipline around saving the excess money that you’re not putting into a mortgage,” she said.

“If you have the discipline to save on the side, you can get ahead of the game.”

Swapping renting for home ownership

At the current historically low interest rates, paying a mortgage is comparable to renting in certain areas, Kent added. It is important to remember that interest rates can rise, however, “so calculate how much you can afford to repay if rates rise to 8 percent”.

If you think you can’t afford a mortgage, compromise on location – look at cheaper neighbouring suburbs to your preferred area. Also consider adjusting your lifestyle to help you save a deposit – Kent suggested cutting down on dining out for home dinner parties as one example. “It comes down to discipline,” she said.

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