Opinion
Will I regret never buying a house and just investing instead?
Paul Benson
Money contributorI’ve been investing in exchange traded funds (ETFs) for several years with the intention of building up a deposit for a home. However, I’ve recently started to question whether I want to buy a home after all. Several of my friends are finding it tough with their mortgages at present (in Sydney), and I’m thinking my current approach of renting plus investing is pretty stress-free. If I just keep doing what I’m doing and don’t buy a house, will I regret it when I’m 60 or 70? I’m 33 now.
Thanks for your question, you’re not alone in this train of thought. Renting can certainly provide flexibility provided you have a good reliable income that enables you to secure a suitable property.
Not having a mortgage and investing elsewhere can be a tempting strategy.Credit: Simon Letch
I’ve crunched some numbers to answer your question. Other than your age and that you live in Sydney, I know nothing about your income, level of savings etc, which is of course relevant. So I’ve worked on the following assumptions.
Your income is $120,000 per year, you have enough savings to make a $170,000 deposit (20 per cent) on an $850,000 property. Your living costs are $55,000 per year. The mortgage is taken out over 30 years at a 6 per cent interest rate.
With these settings, your mortgage repayments are $4087 per month. Assuming the property grows in value by 3 per cent per year after maintenance and running costs, in 30 years you will have a debt-free home worth just more than $2 million.
If instead you kept renting at a cost of $2000 a month, rising with inflation, retained the $170,000 in ETFs, and directed $2087 to ETFs that produce a 7 per cent annual rate of return (income reinvested plus growth), in 30 years you would have an investment portfolio worth just over $2.5 million.
Most people find comfort in owning the roof over their head. But how do you attach a value to that?
So the initial victory goes to the ETFs if you are comfortable with those assumptions. However, there are a few significant “buts”.
Perhaps the most generous tax break in Australia is the capital gains tax exemption on your main residence. Your ETF portfolio is subject to capital gains tax whereas your home is not.
If you sell the ETF portfolio at the end of the 30-year period, a capital gains tax liability of almost $180,000 is triggered (assumes no other earnings), so the net figure of the ETF portfolio would be $2,320,000 – which is still ahead of the property outcome.
The next caveat to point out is that these conclusions are very dependent on the assumptions used. If the growth rate on the property exceeds 3 per cent after maintenance costs, (including the need to replace carpets, refresh the kitchen etc. over the 30-year ownership period), then the property may come out ahead. Conversely, a higher rate of return for the ETFs would push that more convincingly into the lead.
For those concerned that I haven’t made a fair comparison, if the property were a rental generating a 4 per cent yield, its total return would be 7 per cent (income plus growth), the same as the ETF. Since you will be living in the property, there is no rental yield. However, you are also saving on rent.
Perhaps the greatest challenge in providing a helpful answer is that the above is the spreadsheet answer. It’s the emotion-free, nothing-but-numbers answer.
But we don’t live in a spreadsheet. Most people find comfort in owning the roof over their head. But how do you attach a value to that?
Paul Benson is a Certified Financial Planner at Guidance Financial Services. He produces the weekly email GainingCHOICE. Questions to: paul@financialautonomy.com.au
- Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.
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