Is The RBA Wrong?

There’s a story doing the rounds today that the Reserve Bank of Australia (RBA) says that it’s an even bet between renting and buying the property you live in. They’ve crunched the numbers to show that, depending on the general rate in the rise of house prices, it would take anything between nine and 30 years to break even on your mortgage compared to your neighbour who’s renting.

I don’t doubt the ability of the RBA to use a calculator, but the way this story has been reported may make younger renters in particular stop saving for a home deposit and think that renting is the better alternative. The truth is that you can be better off financially by renting, but there is a very large condition attached.

If you are renting and save the difference between what you pay in rent and what you would pay in mortgage repayments into growth assets, over the long term you will win. You have to ensure that you have a very disciplined savings plan into property and shares over many years, but if you do, history shows you will be better off than the family next door (except that at the end of your experiment you can’t live in a share portfolio).

Although I have heard of a case or two where people do employ this strategy, I have never come across it personally. I reckon it’s because it requires an enormous amount of discipline, very much like the discipline required to pay off a mortgage. The difference is that if you stop paying off your house, the bank will come knocking before they eventually take away your keys. If you stop contributing to your growth asset portfolio (which, ironically, might contain an investment property or two) nobody cares.

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